Chapter 12 Testing For Autocorrelation (EC220)

Christopher Dougherty
EC220 - Introduction to econometrics

(chapter 12)
Slideshow: testing for autocorrelation

Original citation:
Dougherty, C. (2012) EC220 - Introduction to econometrics (chapter 12). [Teaching Resource]

2012 The Author
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Simple autoregression of the residuals
1
TESTS FOR AUTOCORRELATION
We will initially confine the discussion of the tests for autocorrelation to its most common
form, the AR(1) process. If the disturbance term follows the AR(1) process, it is reasonable
to hypothesize that, as an approximation, the residuals will conform to a similar process.
+ =
1 t t
e e
t 1
c + =
t t
u u
error

2
t 1
c + =
t t
u u
After all, provided that the conditions for the consistency of the OLS estimators are
satisfied, as the sample size becomes large, the regression parameters will approach their
true values, the location of the regression line will converge on the true relationship, and
the residuals will coincide with the values of the disturbance term.
+ =
1 t t
e e error

3
t 1
c + =
t t
u u
Hence a regression of e
t
on e
t1
is sufficient, at least in large samples. Of course, there is
the issue that, in this regression, e
t1
is a lagged dependent variable, but that does not
matter in large samples.
+ =
1 t t
e e error
4
This is illustrated with the simulation shown in the figure. The true model is as shown, with
u
t
being generated as an AR (1) process with = 0.7.

0
5
-0.5 0 0.5 1
T = 25
T = 50
T = 100
T = 200
0.7
true value
t 1
7 . 0 c + =
t t
u u
1

=
t t
e e
t t
u t Y + + = 0 . 2 10
0
5
-0.5 0 0.5 1
T = 25
T = 50
T = 100
T = 200
0.7
true value
5

The values of the parameters in the model for Y
t
make no difference to the distributions of
the estimator of .
t 1
7 . 0 c + =
t t
u u
1

=
t t
e e
t t
u t Y + + = 0 . 2 10
0
5
-0.5 0 0.5 1
T = 25
T = 50
T = 100
T = 200
0.7
true value
6

As can be seen, when e
t
is regressed on e
t1
, the distribution of the estimator of is left
skewed and heavily biased downwards for T = 25. The mean of the distribution is 0.47.
T mean
25 0.47
50 0.59
100 0.65
200 0.68
t 1
7 . 0 c + =
t t
u u
1

=
t t
e e
t t
u t Y + + = 0 . 2 10
0
5
-0.5 0 0.5 1
T = 25
T = 50
T = 100
T = 200
0.7
true value
7

T mean
25 0.47
50 0.59
100 0.65
200 0.68
t 1
7 . 0 c + =
t t
u u
1

=
t t
e e
t t
u t Y + + = 0 . 2 10
However, as the sample size increases, the downwards bias diminishes and it is clear that it
is converging on 0.7 as the sample becomes large. Inference in finite samples will be
approximate, given the autoregressive nature of the regression.
8
The simple estimator of the autocorrelation coefficient depends on Assumption C.7 part (2)
being satisfied when the original model (the model for Y
t
) is fitted. Generally, one might
expect this not to be the case.

BreuschGodfrey test
t
k
j
jt j t
u X Y + + =

=2
1
| |
9
If the original model contains a lagged dependent variable as a regressor, or violates
Assumption C.7 part (2) in any other way, the estimates of the parameters will be
inconsistent if the disturbance term is subject to autocorrelation.

BreuschGodfrey test
t
k
j
jt j t
u X Y + + =

=2
1
| |
1
2
1
=
+ + =
t
k
j
jt j t
e X e
10
As a repercussion, a simple regression of e
t
on e
t1
will produce an inconsistent estimate of
. The solution is to include all of the explanatory variables in the original model in the
residuals autoregression.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
11
If the original model is the first equation where, say, one of the X variables is Y
t1
, then the
residuals regression would be the second equation.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
12
The idea is that, by including the X variables, one is controlling for the effects of any
endogeneity on the residuals.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
13
The underlying theory is complex and relates to maximum-likelihood estimation, as does
the test statistic. The test is known as the BreuschGodfrey test.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
14
Several asymptotically-equivalent versions of the test have been proposed. The most
popular involves the computation of the lagrange multiplier statistic nR
2
when the residuals
regression is fitted, n being the actual number of observations in the regression.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
Test statistic: nR
2
, distributed as _
2
(1) when
testing for first-order autocorrelation
15
Asymptotically, under the null hypothesis of no autocorrelation, nR
2
is distributed as a chi-
squared statistic with one degree of freedom.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
Test statistic: nR
2
, distributed as _
2
(1) when
testing for first-order autocorrelation
16
A simple t test on the coefficient of e
t1
has also been proposed, again with asymptotic
validity.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e
t
k
j
jt j t
u X Y + + =

=2
1
| |
Alternatively, simple t test on coefficient of e
t1
17
The procedure can be extended to test for higher order autocorrelation. If AR(q)
autocorrelation is suspected, the residuals regression includes q lagged residuals.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e

=

=
+ + =
q
s
s t s
k
j
jt j t
e X e
1 2
1

t
k
j
jt j t
u X Y + + =

=2
1
| |
18
For the lagrange multiplier version of the test, the test statistic remains nR
2
(with n smaller
than before, the inclusion of the additional lagged residuals leading to a further loss of
initial observations).

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e

=

=
+ + =
q
s
s t s
k
j
jt j t
e X e
1 2
1

t
k
j
jt j t
u X Y + + =

=2
1
| |
Test statistic: nR
2
, distributed as _
2
(q)
19
Under the null hypothesis of no autocorrelation, nR
2
has a chi-squared distribution with q
degrees of freedom.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e

=

=
+ + =
q
s
s t s
k
j
jt j t
e X e
1 2
1

t
k
j
jt j t
u X Y + + =

=2
1
| |
Test statistic: nR
2
, distributed as _
2
(q)
20
The t test version becomes an F test comparing RSS for the residuals regression with RSS
for the same specification without the residual terms. Again, the test is valid only
asymptotically.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e

=

=
+ + =
q
s
s t s
k
j
jt j t
e X e
1 2
1

t
k
j
jt j t
u X Y + + =

=2
1
| |
Alternatively, F test on the lagged residuals
H
0
:
1
= ... =
q
= 0, H
1
: not H
0
21
The lagrange multiplier version of the test has been shown to be asymptotically valid for the
case of MA(q) moving average autocorrelation.

BreuschGodfrey test
1
2
1
=
+ + =
t
k
j
jt j t
e X e

=

=
+ + =
q
s
s t s
k
j
jt j t
e X e
1 2
1

t
k
j
jt j t
u X Y + + =

=2
1
| |
Test statistic: nR
2
, distributed as _
2
(q),
valid also for MA(q) autocorrelation
22
The first major test to be developed and popularised for the detection of autocorrelation
was the DurbinWatson test for AR(1) autocorrelation based on the DurbinWatson d
statistic calculated from the residuals using the expression shown.

DurbinWatson test
=
=

=
T
t
t
T
t
t t
e
e e
d
1
2
2
2
1
) (
23
It can be shown that in large samples d tends to 2 2, where is the parameter in the
AR(1) relationship u
t
= u
t1
+ c
t
.

DurbinWatson test

In large samples

No autocorrelation

Severe positive autocorrelation

Severe negative autocorrelation
2 2 d
=
=

=
T
t
t
T
t
t t
e
e e
d
1
2
2
2
1
) (
24
If there is no autocorrelation, is 0 and d should be distributed randomly around 2.

DurbinWatson test

In large samples

No autocorrelation


2 d
2 2 d
=
=

=
T
t
t
T
t
t t
e
e e
d
1
2
2
2
1
) (
25
If there is severe positive autocorrelation, will be near 1 and d will be near 0.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
2 2 d
=
=

=
T
t
t
T
t
t t
e
e e
d
1
2
2
2
1
) (
26
Likewise, if there is severe positive autocorrelation, will be near 1 and d will be near 4.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
4 d
2 2 d
=
=

=
T
t
t
T
t
t t
e
e e
d
1
2
2
2
1
) (
27
Thus d behaves as illustrated graphically above.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
4 d
2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
28
To perform the DurbinWatson test, we define critical values of d. The null hypothesis is H
0
:
= 0 (no autocorrelation). If d lies between these values, we do not reject the null
hypothesis.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
4 d
2 2 d
2 4 0 d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit

29
The critical values, at any significance level, depend on the number of observations in the
sample and the number of explanatory variables.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
4 d
2 2 d
2 4 0 d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit

30
Unfortunately, they also depend on the actual data for the explanatory variables in the
sample, and thus vary from sample to sample.

DurbinWatson test

In large samples

No autocorrelation


2 d
0 d
4 d
2 2 d
2 4 0 d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit

31
However Durbin and Watson determined upper and lower bounds, d
U
and d
L
, for the critical
values, and these are presented in standard tables.
2 d
0 d
4 d
2 4 0 d
L
d
U
d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit


DurbinWatson test

In large samples

No autocorrelation


2 2 d
32
2 d
0 d
4 d
2 4 0 d
L
d
U
d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit


DurbinWatson test

In large samples

No autocorrelation


2 2 d
If d is less than d
L
, it must also be less than the critical value of d for positive
autocorrelation, and so we would reject the null hypothesis and conclude that there is
positive autocorrelation.
33
2 d
0 d
4 d
2 4 0 d
L
d
U
d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit


DurbinWatson test

In large samples

No autocorrelation


2 2 d
If d is above than d
U
, it must also be above the critical value of d, and so we would not reject
the null hypothesis. (Of course, if it were above 2, we should consider testing for negative
autocorrelation instead.)
34
2 d
0 d
4 d
2 4 0 d
L
d
U
d
crit

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
crit


DurbinWatson test

In large samples

No autocorrelation


2 2 d
If d lies between d
L
and d
U
, we cannot tell whether it is above or below the critical value and
so the test is indeterminate.
35
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
Here are d
L
and d
U
for 45 observations and two explanatory variables, at the 5% significance
level.
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
36
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
There are similar bounds for the critical value in the case of negative autocorrelation. They
are not given in the standard tables because negative autocorrelation is uncommon, but it
is easy to calculate them because are they are located symmetrically to the right of 2.
2.38 2.57
37
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
2.38 2.57
So if d < 1.43, we reject the null hypothesis and conclude that there is positive
autocorrelation.
38
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
2.38 2.57
If 1.43 < d < 1.62, the test is indeterminate and we do not come to any conclusion.
39
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
2.38 2.57
If 1.62 < d < 2.38, we do not reject the null hypothesis of no autocorrelation.
40
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
2.38 2.57
If 2.38 < d < 2.57, we do not come to any conclusion.
41
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
1.43 1.62
(n = 45, k = 3, 5% level)
2 4 0 d
L
d
U

positive
autocorrelation
negative
autocorrelation
no
autocorrelation
2.38 2.57
If d > 2.57, we conclude that there is significant negative autocorrelation.
42
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
Here are the bounds for the critical values for the 1% test, again with 45 observations and
two explanatory variables.
d
L
d
U

1.24 1.42 2.58 2.76
(n = 45, k = 3, 1% level)
43
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
L
d
U

1.24 1.42 2.58 2.76
(n = 45, k = 3, 1% level)
The Durbin-Watson test is valid only when all the explanatory variables are deterministic.
This is in practice a serious limitation since usually interactions and dynamics in a system
of equations cause Assumption C.7 part (2) to be violated.
44
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
L
d
U

1.24 1.42 2.58 2.76
(n = 45, k = 3, 1% level)
In particular, if the lagged dependent variable is used as a regressor, the statistic is biased
towards 2 and therefore will tend to under-reject the null hypothesis. It is also restricted to
testing for AR(1) autocorrelation.
45
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
L
d
U

1.24 1.42 2.58 2.76
(n = 45, k = 3, 1% level)
Despite these shortcomings, it remains a popular test and some major applications produce
the d statistic automatically as part of the standard regression output.
46
2 d
0 d
4 d

DurbinWatson test

In large samples

No autocorrelation


2 2 d
2 4 0
positive
autocorrelation
negative
autocorrelation
no
autocorrelation
d
L
d
U

1.24 1.42 2.58 2.76
(n = 45, k = 3, 1% level)
It does have the appeal of the test statistic being part of standard regression output.
Further, it is appropriate for finite samples, subject to the zone of indeterminacy and the
deterministic regressor requirement.
47
Durbin proposed two tests for the case where the use of the lagged dependent variable as a
regressor made the original DurbinWatson test inapplicable. One was a precursor to the
BreuschGodrey test.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
48
The other is the Durbin h test, appropriate for the detection of AR(1) autocorrelation.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
49
The Durbin h statistic is defined as shown, where is an estimate of in the AR(1)
process, is an estimate of the variance of the coefficient of the lagged dependent
variable, and n is the number of observations in the regression.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2
) 1 ( Y
b
s
50
There are various ways in which one might estimate but, since this test is valid only for
large samples, it does not matter which is used. The most convenient is to take advantage
of the fact that d tends to 2 2 in large samples. The estimator is then 1 0.5d.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2 2 d
d 5 . 0 1 =
51
The estimate of the variance of the coefficient of the lagged dependent variable is obtained
by squaring its standard error.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2 2 d
d 5 . 0 1 =
52
Thus h can be calculated from the usual regression results. In large samples, under the
null hypothesis of no autocorrelation, h is distributed as a normal variable with zero mean
and unit variance.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2 2 d
d 5 . 0 1 =
53
An occasional problem with this test is that the h statistic cannot be computed if n
is greater than 1, which can happen if the sample size is not very large.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2 2 d
d 5 . 0 1 =
2
) 1 ( Y
b
s
54
An even worse problem occurs when n is near to, but less than, 1. In such a situation
the h statistic could be enormous, without there being any problem of autocorrelation.

Durbins h test
2
) 1 (
1
=
Y
b
ns
n
h
2 2 d
d 5 . 0 1 =
2
) 1 ( Y
b
s
55
The output shown in the table gives the result of a logarithmic regression of expenditure on
food on disposable personal income and the relative price of food.

============================================================
Dependent Variable: LGFOOD
Method: Least Squares
Sample: 1959 2003
Included observations: 45
============================================================
Variable Coefficient Std. Error t-Statistic Prob.
============================================================
C 2.236158 0.388193 5.760428 0.0000
LGDPI 0.500184 0.008793 56.88557 0.0000
LGPRFOOD -0.074681 0.072864 -1.024941 0.3113
============================================================
R-squared 0.992009 Mean dependent var 6.021331
Adjusted R-squared 0.991628 S.D. dependent var 0.222787
S.E. of regression 0.020384 Akaike info criter-4.883747
Sum squared resid 0.017452 Schwarz criterion -4.763303
Log likelihood 112.8843 Hannan-Quinn crite-4.838846
F-statistic 2606.860 Durbin-Watson stat 0.478540
Prob(F-statistic) 0.000000
============================================================
56
The plot of the residuals is shown. All the tests indicate highly significant autocorrelation.

-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
Residuals, static logarithmic regression for FOOD
57

============================================================
Dependent Variable: ELGFOOD
Sample(adjusted): 1960 2003
Included observations: 44 after adjusting endpoints
============================================================
Variable CoefficientStd. Errort-Statistic Prob.
============================================================
ELGFOOD(-1) 0.790169 0.106603 7.412228 0.0000
============================================================
R-squared 0.560960 Mean dependent var 3.28E-05
Log likelihood 127.9936 Durbin-Watson stat 1.477337
============================================================
ELGFOOD in the regression above is the residual from the LGFOOD regression. A simple
regression of ELGFOOD on ELGFOOD(1) yields a coefficient of 0.79 with standard error
0.11.
1
79 . 0

=
t t
e e
58

============================================================
============================================================
============================================================
ELGFOOD(-1) 0.790169 0.106603 7.412228 0.0000
============================================================
============================================================
1
79 . 0

=
t t
e e
Technical note for EViews users: EViews places the residuals from the most recent
regression in a pseudo-variable called resid. resid cannot be used directly. So the
residuals were saved as ELGFOOD using the genr command:
genr ELGFOOD = resid
59
Adding an intercept, LGDPI and LGPRFOOD to the specification, the coefficient of the
lagged residuals becomes 0.81 with standard error 0.11. R
2
is 0.5720, so nR
2
is 25.17.

============================================================
============================================================
============================================================
C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
ELGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
============================================================
Log likelihood 128.5543 F-statistic 17.81977
Durbin-Watson stat 1.513911 Prob(F-statistic) 0.000000
============================================================
1
81 . 0 ...

+ =
t t
e e
5720 . 0
2
= R
17 . 25 5720 . 0 44
2
= = nR ( ) 83 . 10 1
% 1 . 0
2
= _
60

============================================================
============================================================
============================================================
C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
ELGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
============================================================
============================================================
1
81 . 0 ...

+ =
t t
e e
5720 . 0
2
= R
17 . 25 5720 . 0 44
2
= = nR ( ) 83 . 10 1
% 1 . 0
2
= _
(Note that here n = 44. There are 45 observations in the regression in Table 12.1, and one
fewer in the residuals regression.) The critical value of chi-squared with one degree of
freedom at the 0.1 percent level is 10.83.
61

Technical note for EViews users: one can perform the test simply by following the LGFOOD
regression with the command auto(1). EViews allows itself to use resid directly.

============================================================
Breusch-Godfrey Serial Correlation LM Test:
============================================================
F-statistic 54.78773 Probability 0.000000
Obs*R-squared 25.73866 Probability 0.000000
============================================================
Test Equation:
Dependent Variable: RESID
Presample missing value lagged residuals set to zero.
============================================================
============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
R-squared 0.571970 Mean dependent var-1.85E-18
============================================================
62

The argument in the auto command relates to the order of autocorrelation being tested. At
the moment we are concerned only with first-order autocorrelation. This is why the
command is auto(1).

============================================================
============================================================
============================================================
Test Equation:
============================================================
============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
============================================================
63

When we performed the test, resid(1), and hence ELGFOOD(1), were not defined for the
first observation in the sample, so we had 44 observations from 1960 to 2003.

============================================================
============================================================
============================================================
Test Equation:
============================================================
============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
============================================================
64

EViews uses the first observation by assigning a value of zero to the first observation for
resid(1). Hence the test results are very slightly different.

============================================================
============================================================
============================================================
Test Equation:
============================================================
============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
============================================================
65

============================================================
============================================================
============================================================
C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
ELGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
============================================================
============================================================
We can also perform the test with a t test on the coefficient of the lagged variable.
66

Here is the corresponding output using the auto command built into EViews. The test is
presented as an F statistic. Of course, when there is only one lagged residual, the F
statistic is the square of the t statistic.

============================================================
============================================================
============================================================
Test Equation:
============================================================
============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
============================================================
67
The DurbinWatson statistic is 0.48. d
L
is 1.24 for a 1 percent significance test (2
explanatory variables, 45 observations).

============================================================
Sample: 1959 2003
============================================================
============================================================
C 2.236158 0.388193 5.760428 0.0000
LGDPI 0.500184 0.008793 56.88557 0.0000
LGPRFOOD -0.074681 0.072864 -1.024941 0.3113
============================================================
============================================================
d
L
= 1.24 (1% level, 2 explanatory variables, 45 observations)
68
The BreuschGodfrey test for higher-order autocorrelation is a straightforward extension of
the first-order test. If we are testing for order q, we add q lagged residuals to the right side
of the residuals regression. We will perform the test for second-order autocorrelation.
t t t t
u u u c + + =
2 2 1 1
69
Here is the regression for ELGFOOD with two lagged residuals. The BreuschGodfrey test
statistic is 25.89. With two lagged residuals, the test statistic has a chi-squared distribution
with two degrees of freedom under the null hypothesis. It is significant at the 0.1 percent
level

============================================================
============================================================
============================================================
C 0.071220 0.277253 0.256879 0.7987
LGDPI 0.000251 0.006491 0.038704 0.9693
LGPRFOOD -0.015572 0.051617 -0.301695 0.7645
ELGFOOD(-1) 1.009693 0.163240 6.185318 0.0000
ELGFOOD(-2) -0.289159 0.171960 -1.681548 0.1009
============================================================
============================================================
89 . 25 6020 . 0 43
2
= = nR ( ) 82 . 13 2
% 1 . 0
2
= _
70
We will also perform an F test, comparing the RSS with the RSS for the same regression
without the lagged residuals. We know the result, because one of the t statistics is very
high.

============================================================
============================================================
============================================================
C 0.071220 0.277253 0.256879 0.7987
LGDPI 0.000251 0.006491 0.038704 0.9693
LGPRFOOD -0.015572 0.051617 -0.301695 0.7645
ELGFOOD(-1) 1.009693 0.163240 6.185318 0.0000
ELGFOOD(-2) -0.289159 0.171960 -1.681548 0.1009
============================================================
============================================================
71
Here is the regression for ELGFOOD without the lagged residuals. Note that the sample
period has been adjusted to 1961 to 2003, to make RSS comparable with that for the
previous regression.

============================================================
Sample: 1961 2003
============================================================
============================================================
C 0.027475 0.412043 0.066680 0.9472
LGDPI -0.001074 0.009986 -0.107528 0.9149
LGPRFOOD -0.003948 0.076191 -0.051816 0.9589
============================================================
Adjusted R-squared -0.049687 S.D. dependent var 0.020368
============================================================
72
The F statistic is 28.72. This is significant at the 1% level. The critical value for F(2,35) is
8.47. That for F(2,38) must be slightly lower.

============================================================
Sample: 1961 2003
============================================================
============================================================
C 0.027475 0.412043 0.066680 0.9472
LGDPI -0.001074 0.009986 -0.107528 0.9149
LGPRFOOD -0.003948 0.076191 -0.051816 0.9589
============================================================
Adjusted R-squared -0.049687 S.D. dependent var 0.020368
============================================================
( )
( )
72 . 28
38 / 006935 . 0
2 / 006935 . 0 017419 . 0
38 , 2 =
= F
( ) 47 . 8 35 , 2
crit,0.1%
= F
73

Here is the output using the auto(2) command in EViews. The conclusions for the two
tests are the same.

============================================================
============================================================
============================================================
Test Equation:
============================================================
============================================================
C 0.053628 0.261016 0.205460 0.8383
LGDPI 0.000920 0.005705 0.161312 0.8727
LGPRFOOD -0.013011 0.049304 -0.263900 0.7932
RESID(-1) 1.011261 0.159144 6.354360 0.0000
RESID(-2) -0.290831 0.167642 -1.734833 0.0905
============================================================
============================================================
74
The table above gives the result of a parallel logarithmic regression with the addition of
lagged expenditure on food as an explanatory variable. Again, there is strong evidence that
the specification is subject to autocorrelation.

============================================================
Sample (adjusted): 1960 2003
Included observations: 44 after adjustments
============================================================
============================================================
C 0.985780 0.336094 2.933054 0.0055
LGDPI 0.126657 0.056496 2.241872 0.0306
LGPRFOOD -0.088073 0.051897 -1.697061 0.0975
LGFOOD(-1) 0.732923 0.110178 6.652153 0.0000
============================================================
============================================================
75
Here is a plot of the residuals.
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
Residuals, ADL(1,0) logarithmic regression for FOOD
76
A simple regression of the residuals on the lagged residuals yields a coefficient of 0.43 with
standard error 0.14. We expect the estimate to be adversely affected by the presence of the
lagged dependent variable in the regression for LGFOOD.

============================================================
============================================================
============================================================
ELGFOOD(-1) 0.431010 0.143277 3.008226 0.0044
============================================================
============================================================
1
43 . 0

=
t t
e e
77
With an intercept, LGDPI, LGPRFOOD, and LGFOOD(1) added to the specification, the
coefficient of the lagged residuals becomes 0.60 with standard error 0.17. R
2
is 0.2469, so
nR
2
is 10.62, not quite significant at the 0.1 percent level. (Note that here n = 43.)

============================================================
============================================================
============================================================
C 0.417342 0.317973 1.312507 0.1972
LGDPI 0.108353 0.059784 1.812418 0.0778
LGPRFOOD -0.005585 0.046434 -0.120279 0.9049
LGFOOD(-1) -0.214252 0.116145 -1.844700 0.0729
ELGFOOD(-1) 0.604346 0.172040 3.512826 0.0012
============================================================
============================================================
62 . 10 2469 . 0 43
2
= = nR ( ) 83 . 10 1
% 1 . 0
2
= _
78
The DurbinWatson statistic is 1.11. From this one obtains an estimate of as 1 0.5d =
0.445. The standard error of the coefficient of the lagged dependent variable is 0.1102.
Hence the h statistic is as shown.

============================================================
============================================================
============================================================
C 0.985780 0.336094 2.933054 0.0055
LGDPI 0.126657 0.056496 2.241872 0.0306
LGPRFOOD -0.088073 0.051897 -1.697061 0.0975
LGFOOD(-1) 0.732923 0.110178 6.652153 0.0000
============================================================
============================================================
( )
33 . 4
1102 . 0 44 1
44
445 . 0
1
2 2
) 1 (
=
=
Y
b
ns
n
h
79
Under the null hypothesis of no autocorrelation, the h statistic asymptotically has a
standardized normal distribution, so this value is above the critical value at the 0.1 percent
level, 3.29.

============================================================
============================================================
============================================================
C 0.985780 0.336094 2.933054 0.0055
LGDPI 0.126657 0.056496 2.241872 0.0306
LGPRFOOD -0.088073 0.051897 -1.697061 0.0975
LGFOOD(-1) 0.732923 0.110178 6.652153 0.0000
============================================================
============================================================
( )
33 . 4
1102 . 0 44 1
44
445 . 0
1
2 2
) 1 (
=
=
Y
b
ns
n
h

Copyright Christopher Dougherty 2011.

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The content of this slideshow comes from Section 12.2 of C. Dougherty,
Introduction to Econometrics, fourth edition 2011, Oxford University Press.
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or the University of London International Programmes distance learning course
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2012.02.23

Chapter 12 Testing For Autocorrelation (EC220)

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